Deck 3: Accruals and Deferrals: Timing Is Everything in Accounting

Question 1

How is net income calculated and on what financial statement(s)is it reported?

Answer 1

Net income is calculated by matching all expenses incurred during a given accounting period with all revenues earned during that same period.Thus,net income is based on the accrual basis of accounting.Net income is reported on the income statement and the statement of changes in shareholders' equity.

Question 2

Accrual accounting requires that revenue be recorded when it is earned even if the cash from a sale to a customer has not been collected yet.

Answer 2

True

Question 3

Explain why adjustments are needed at the end of each accounting period.

Answer 3

Adjustments are needed to update certain account balances at the end of each period.These updates are needed because of timing differences between collecting cash and earning revenue,and timing differences between paying cash and incurring expenses.Without these adjustments,the proper amounts of revenues and expenses would not be recorded on the income statement and the statement of changes in shareholders' equity.Similarly,assets,liabilities,and shareholders' equity would be misstated on the balance sheet.

Question 4

Details,Inc.paints a truck on May 31.The customer picks up the truck on June 6 and mails the payment to Details on August 5.Details receives the check in the mail on August 8.When should Details record that the revenue was earned?

A)May 31
B)June 6
C)August 5
D)August 8

Question 5

Supplies on the balance sheet equals the amount of supplies used up during a period.

Question 6

If a company's expenses for the period are greater than its revenues,then the company will report ________.

A)net income
B)a decrease in cash
C)a net loss
D)both a decrease in cash and a net loss

Question 7

Revenue earned on the income statement will always equal Cash collected from customers on the statement of cash flows.

Question 8

The term accounts receivable is used to describe ________.

A)amounts owed to creditors
B)amounts due from customers as a result of credit sales
C)amounts that have already been collected from customers
D)amounts owed to suppliers

Question 9

Making an adjustment for a transaction in which the action has occurred but the cash has not yet changed hands is called "accruing" the revenue or expense.

Question 10

The revenue recognition principle requires that revenue be recognized in the accounting records ________.

A)when cash is received
B)when it is earned
C)at the end of the accounting period
D)in the period the income taxes are paid

Question 11

A deferral is a transaction in which the exchange of dollars comes before the action.

Question 12

An accrual is a transaction in which the action comes after the exchange of cash.

Question 13

The income statement is sometimes called the statement of earnings.

Question 14

An accrual is ________.

A)a transaction in which the action comes before the exchange of cash
B)a transaction in which the exchange of dollars comes before the action takes place
C)another term for a deferral
D)recorded when cash is paid in advance of receiving the service

Question 15

Which of the following is a TRUE statement about the matching principle?

A)The matching principle states that expenses should be recognized when cash is paid for an item.
B)The matching principle states that assets must match,or equal,liabilities plus shareholders' equity.
C)The matching principle states that expenses incurred should be recognized in the same period as revenues earned.
D)The matching principle states that,after adjustments,expenses must equal revenues in each accounting period.

Question 16

Net income equals ________.

A)revenues minus liabilities
B)assets minus liabilities
C)the change in shareholders' equity from the beginning of the year to the end of the year
D)revenues minus expenses

Question 17

Explain the difference between accruals and deferrals.

Question 18

Describe the accrual basis of accounting.

Question 19

Net income means the same thing as net ________.

A)expenses
B)revenues
C)cash
D)profit

Question 20

Sales revenue is usually considered earned when ________.

A)cash is received from credit sales
B)the customer places an order for goods to be shipped
C)goods have been shipped from the seller to the buyer
D)the adjustments are made at the end of the accounting period

Question 21

Adjusting entries for accruals will never affect ________.

A)shareholders' equity
B)expenses
C)liabilities
D)cash

Question 22

Mariner,Inc.bought a lobster boat on November 1,2011 in exchange for a 2-month,6%,$80,000 note.The note plus interest will be repaid on January 1,2012,the maturity date.How much interest payable should the company report on its balance sheet at November 30,2011?

A)$0
B)$4,800
C)$400
D)$800

Question 23

Lumbers,Inc.lends $3,000 at 12% to an employee on September 1,2012.The employee agrees to pay the interest and principal in two years.Which of the following will be reported on Lumbers' year ended December 31,2012 financial statements?

A)The balance sheet will report Interest receivable of $120.
B)The income statement will report Interest revenue of $0.
C)The statement of cash flows will report Cash received for interest of $120.
D)The income statement will report Interest income of $360.

Question 24

Mac,Inc.purchased a truck on October 1,2011 in exchange for a 12-month,9%,$100,000 note.What effect does the October 31,2011 adjusting entry for interest have on the company's total shareholders' equity?

A)increase
B)decrease
C)no effect

Question 25

On May 1,2012,Mink,Inc.borrowed $10,000 by issuing a 12%,3-month note and another $10,000 by issuing a 12%,6-month note.Interest expense for the month ended May 31,2012 equals ________.

A)$(400)on the income statement
B)$(200)on the income statement
C)$(300)on the income statement
D)$(2,400)on the income statement

Question 26

Slumbers,Inc.borrows $3,000 at 12% from a bank on September 1,2012 and agrees to pay the interest and principal in two years.What is the effect on the accounting equation of the adjusting entry to record interest for the year ended December 31,2012?

A)Assets will increase by $3,000.
B)Liabilities will decrease by $120.
C)Shareholders' equity will decrease by $120.
D)Cash will decrease by $120.

Question 27

On May 1,2012,Mink,Inc.borrowed $10,000 by issuing a 12%,3-month note and another $10,000 by issuing a 12%,6-month note.Interest expense for the month ended May 31,2012 will be ________.

A)greater on the 3-month note than the 6-month note
B)greater on the 6-month note than the 3-month note
C)$200 for both notes combined
D)$0 for both notes because no interest was paid

Question 28

How much interest will accrue over ten months on a $50,000,6% loan?

A)$3,000
B)$3,600
C)$300
D)$2,500

Question 29

How much interest will accrue over three months on a $10,000,9% loan?

A)$300
B)$225
C)$900
D)$2,700

Question 30

Mariner,Inc.bought a lobster boat on November 1,2011 in exchange for a 2-month,6%,$80,000 note.The note plus interest will be repaid on January 1,2012,the maturity date.How much interest payable should the company report on its balance sheet at December 31,2011?

A)$0
B)$4,800
C)$400
D)$800

Question 31

Mac,Inc.purchased a truck on October 1,2011 in exchange for a 12-month,9%,$100,000 note.What effect does the October 31,2011 adjusting entry for interest have on the company's total assets?

A)increase
B)decrease
C)no effect

Question 32

Salaries payable on the balance sheet most likely means that ________.

A)the company is in serious financial difficulty.It doesn't even have enough cash to pay its employees
B)the company's accountants are seriously confused.Salaries appear on the income statement,not on the balance sheet
C)employees did not receive payment for the last few days of work because the last day of the accounting period was not a payday
D)employees were overpaid and now owe the company money

Question 33

Mac,Inc.purchased a truck on October 1,2011 in exchange for a 12-month,9%,$100,000 note.What effect does the October 31,2011 adjusting entry for interest have on the company's total liabilities?

A)increase
B)decrease
C)no effect

Question 34

Other receivables represents the amount ________.

A)customers owe for goods or services previously delivered
B)collected in advance of performing the services
C)lent to others
D)borrowed from others

Question 35

Slumbers,Inc.borrows $3,000 at 12% from a bank on September 1,2012 and agrees to pay the interest and principal in two years.Which of the following will be reported on the year ended December 31,2012 financial statements?

A)The balance sheet will report Interest payable of $120.
B)The income statement will report Interest expense of $0.
C)The statement of cash flows will report Cash paid for interest of $120.
D)The income statement will report Interest expense of $360.

Question 36

Mariner,Inc.bought a lobster boat on November 1,2011 in exchange for a 2-month,6%,$80,000 note.The note plus interest will be repaid on January 1,2012,the maturity date.How much interest expense should the company report on its income statement for the month ended December 31,2011?

A)$0
B)$4,800
C)$400
D)$800

Question 37

If a company has Other receivables on its balance sheet it most likely will show ________ on its income statement.

A)Interest revenue
B)Interest expense
C)Interest receivable
D)Interest payable

Question 38

Mariner,Inc.bought a lobster boat on November 1,2011 in exchange for a 2-month,6%,$80,000 note.The note plus interest will be repaid on January 1,2012,the maturity date.How much interest expense should the company report on its income statement for the month ended November 30,2011?

A)$0
B)$4,800
C)$400
D)$800

Question 39

Which financial statement shows Cash paid to employees?

A)Income statement
B)Statement of changes in shareholders' equity
C)Statement of cash flows
D)Balance sheet

Question 40

The employees of Dew Drop Inn get paid every Friday for a 5-day workweek (Monday through Friday).The total payroll is $5,000 per day of work.If the accounting period ends on Thursday of a given week,what adjustment must be made to the company's accounting records?

A)Decrease Cash by $20,000 and decrease shareholders' equity by recognizing Salaries expense for the same amount.
B)Increase Salaries payable by $20,000 and increase shareholders' equity by recognizing Salaries expense for the same amount.
C)Increase Salaries payable by $20,000 and decrease shareholders' equity by recognizing Salaries expense for the same amount.
D)No adjustment is necessary because there is no expense until the employees are paid on Friday.

Question 41

The cost of borrowing money from a creditor is called the principal of the loan.

Question 42

The employees of Dew Drop Inn get paid every Friday for a 5-day workweek (Monday through Friday).The total payroll is $5,000 per day of work.If the accounting period ends on Wednesday of a given week,what adjustment must be made to the company's accounting records?

A)Increase Salaries payable by $15,000 and increase shareholders' equity by recognizing Salaries expense for the same amount.
B)Increase Salaries payable by $15,000 and decrease shareholders' equity by recognizing Salaries expense for the same amount.
C)Decrease Cash by $15,000 and decrease shareholders' equity by recognizing Salaries expense for the same amount.
D)No adjustment is necessary because there is no expense until the employees are paid on Friday.

Question 43

The total payroll is $6,000 per day of work.If the accounting period ends on Tuesday of a given week,what adjustment must be made to the company's accounting records?

A)Increase Salaries payable by $12,000 and decrease shareholders' equity by recognizing Salaries expense for the same amount.
B)Increase Salaries payable by $12,000 and increase shareholders' equity by recognizing Salaries expense for the same amount.
C)Decrease Cash by $12,000 and decrease shareholders' equity by recognizing Salaries expense for the same amount.
D)No adjustment is necessary because there is no expense until the employees are paid on Friday.

Question 44

The employees of Dew Drop Inn get paid every Friday for a 5-day workweek (Monday through Friday).The total payroll is $5,000 per day of work.If the accounting period ends on Thursday of a given week,and the proper adjustment is made on Thursday,what will be the effect on the company's accounting system on Friday when the employees are paid for the week?

A)Decrease Cash by $25,000 and decrease shareholders' equity by recognizing Salaries expense for the same amount.
B)Decrease Cash by $25,000,decrease shareholders' equity by recognizing Salaries expense for $20,000 and decrease Salaries payable by $5,000.
C)Decrease Cash by $25,000,decrease shareholders' equity by recognizing Salaries expense for $5,000 and decrease Salaries payable by $20,000.
D)Decrease Cash by $5,000 and decrease shareholders' equity by recognizing Salaries expense for the same amount.

Question 45

The employees of Dew Drop Inn get paid every Friday for a 5-day workweek (Monday through Friday).The total payroll is $5,000 per day of work.If the accounting period ends on Friday of a given week,what effect will this have on the company's accounting system?

A)Decrease Cash by $25,000 and decrease shareholders' equity by recognizing Salaries expense for the same amount.
B)Increase Salaries payable by $25,000 and increase shareholders' equity by recognizing Salaries expense for the same amount.
C)Increase Salaries payable by $25,000 and decrease shareholders' equity by recognizing Salaries expense for the same amount.
D)Decrease Cash by $5,000 and decrease shareholders' equity by recognizing Salaries expense for the same amount.

Question 46

The total payroll is $4,000 per day of work.If the accounting period ends on Friday of a given week,what entry must be made to the company's accounting records?

A)Decrease Cash by $20,000 and decrease shareholders' equity by recognizing Salaries expense for the same amount.
B)Increase Salaries payable by $20,000 and decrease shareholders' equity by recognizing Salaries expense for the same amount.
C)Increase Salaries payable by $20,000 and increase shareholders' equity by recognizing Salaries expense for the same amount.
D)Decrease Cash by $4,000 and decrease shareholders' equity by recognizing Salaries expense for the same amount.

Question 47

The employees of Dew Drop Inn get paid every Friday for a 5-day work week (Monday through Friday).The total payroll is $5,000 per day of work.If the accounting period ends on Wednesday of a given week,and the proper adjustment is made on Wednesday,what will be the effect of the adjustment on the company's financial statements?

A)The balance sheet will report Salaries payable of $25,000.
B)The income statement will report additional salaries expense of $25,000.
C)The balance sheet will report Salaries payable of $15,000.
D)The income statement will report Salaries payable of $15,000.

Question 48

At December 31,2010,McToil,Inc.owes its employees $20,000 for work performed in 2010.Payday is not until the first week in January 2011.What is the effect of the December 31,2010 adjusting entry on the company's total liabilities?

A)increase
B)decrease
C)no effect
D)changed in a way that cannot be predicted

Question 49

The employees of Dew Drop Inn get paid every Friday for a 5-day workweek (Monday through Friday).The total payroll is $5,000 per day of work.If the accounting period ends on Thursday of a given week,and the proper adjustment is made on Thursday,what will be the effect of the adjustment on the company's financial statements?

A)The balance sheet will report additional salaries expense of $20,000.
B)The balance sheet will report additional salaries expense of $25,000.
C)The income statement will report additional salaries expense of $20,000.
D)The income statement will report additional salaries expense of $25,000.

Question 50

Which financial statement shows Salaries expense?

A)Income statement
B)Statement of changes in shareholders' equity
C)Statement of cash flows
D)Balance sheet

Question 51

At December 31,2010,McToil,Inc.owes its employees $20,000 for work performed in 2010.Payday is not until the first week in January 2011.What is the effect of the December 31,2010 adjusting entry on the company's total assets?

A)increase
B)decrease
C)no effect
D)changed in a way that cannot be predicted

Question 52

The employees of Dew Drop Inn get paid every Friday for a 5-day workweek (Monday through Friday).The total payroll is $5,000 per day of work.If the accounting period ends on Wednesday of a given week and the proper adjustment is made on Wednesday,what will be the effect of the adjustment on the company's financial statements?

A)The balance sheet will report additional salaries expense of $15,000.
B)The balance sheet will report additional salaries expense of $25,000.
C)The income statement will report additional salaries expense of $15,000.
D)The income statement will report additional salaries expense of $25,000.

Question 53

The total payroll is $3,000 per day of work.If the accounting period ends on Thursday of a given week,what adjustment must be made to the company's accounting records?

A)Increase Salaries payable by $15,000 and decrease shareholders' equity by recognizing Salaries expense for the same amount.
B)Increase Salaries payable by $12,000 and decrease shareholders' equity by recognizing Salaries expense for the same amount.
C)Decrease Cash by $12,000 and decrease shareholders' equity by recognizing Salaries expense for the same amount.
D)No adjustment is necessary because there is no expense until the employees are paid on Friday.

Question 54

Which financial statement shows Salaries payable?

A)Income statement
B)Statement of changes in shareholders' equity
C)Statement of cash flows
D)Balance sheet

Question 55

The total payroll is $4,000 per day of work.If the accounting period ends on Wednesday of a given week,what adjustment must be made to the company's accounting records?

A)Decrease Cash by $12,000 and decrease shareholders' equity by recognizing Salaries expense for the same amount.
B)Increase Salaries payable by $20,000 and decrease shareholders' equity by recognizing Salaries expense for the same amount.
C)Increase Salaries payable by $12,000 and decrease shareholders' equity by recognizing Salaries expense for the same amount.
D)No adjustment is necessary because there is no expense until the employees are paid on Friday.

Question 56

The total payroll is $4,000 per day of work.If the accounting period ends on Tuesday of a given week,what adjustment must be made to the company's accounting records?

A)Increase Salaries payable by $8,000 and decrease shareholders' equity by recognizing Salaries expense for the same amount.
B)Decrease Salaries payable by $8,000 and increase shareholders' equity by recognizing Salaries expense for the same amount.
C)Decrease Cash by $8,000 and decrease shareholders' equity by recognizing Salaries expense for the same amount.
D)No adjustment is necessary because the expense is not recorded until the employees are paid.

Question 57

At December 31,2010,McToil,Inc.owes its employees $20,000 for work performed in 2010.Payday is not until the first week in January 2011.What is the effect of the December 31,2010 adjusting entry on total shareholders' equity?

A)increase
B)decrease
C)no effect
D)changed in a way that cannot be predicted

Question 58

The employees of Dew Drop Inn get paid every Friday for a 5-day workweek (Monday through Friday).The total payroll is $5,000 per day of work.If the accounting period ends on Thursday of a given week,and the proper adjustment is made on Thursday,what will be the effect of the adjustment on the company's financial statements?

A)The balance sheet will report Salaries payable of $20,000.
B)The income statement will report additional salaries expense of $25,000.
C)The balance sheet will report additional salaries expense of $20,000.
D)The income statement will report Salaries payable of $20,000.

Question 59

Rent a Wreck,Inc.began operations on July 1,2012.On July 1,the company paid $9,600 cash in advance for a one-year insurance policy beginning on that day.How much insurance expense will appear on the company's income statement for the year ended December 31,2012?

A)$800
B)$9,600
C)$4,800
D)$8,800

Question 60

Reader,Inc.collected $12,000 in October 2011 from customers in exchange for 12-month subscriptions to its monthly magazine Reader.The October issue was the first issue of the subscription.How much revenue should the company report on its income statement for the year ended March 31,2012?

A)$12,000
B)$8,000
C)$6,000
D)No revenue will be recognized until all the magazines are delivered.

Question 61

The Unearned revenue account represents the amount of ________.

A)cash paid to customers during the period
B)cash collected from customers during a period
C)goods and services sold to customers during a period
D)goods and services that a company owes its customers

Question 62

Magic,Inc.collected $12,000 in October 2011 from customers in exchange for 12-month subscriptions to its monthly magazine Magic Times.The October issue was the first issue of the subscription.How much revenue should the company report on its income statement for the year ended December 31,2011?

A)$3,000
B)$6,000
C)$12,000
D)No revenue will be recognized until all the magazines are delivered.

Question 63

What type of account is Unearned revenue?

A)an asset
B)a liability
C)a revenue
D)part of shareholders' equity

Question 64

Rent-a-Wreck,Inc.paid $36,000 cash for a one-year insurance policy on July 1,2011.What adjustment should the company make before preparing its annual financial statements on December 31,2011?

A)Decrease Cash and increase Prepaid insurance by $18,000.
B)Decrease Prepaid insurance and recognize Insurance expense of $18,000.
C)Decrease Prepaid insurance and recognize Insurance expense of $36,000.
D)Decrease Cash and recognize Insurance expense of $18,000.

Question 65

Rent-a-Wreck,Inc.paid $12,000 cash for a one-year insurance policy on November 1,2012.What adjustment should the company make before preparing its annual financial statements on December 31,2012?

A)Decrease Cash and increase Prepaid insurance by $2,000.
B)Decrease Cash and recognize Insurance expense of $12,000.
C)Decrease Prepaid insurance and recognize Insurance expense of $1,000.
D)Decrease Prepaid insurance and recognize Insurance expense of $2,000.

Question 66

Hen House,Inc.collects all subscription revenue in advance.At December 31,2011,the company owed $50,000 to customers for unearned revenue.During 2012,the company received $150,000 in advance from its customers and delivered $190,000 of magazines to its customers.How much unearned revenue will Hen House report on its balance sheet at December 31,2012?

A)$200,000
B)$190,000
C)$10,000
D)$210,000

Question 67

In February,Ira Roth,Public Accountant,accepted $500 in cash from a customer in exchange for a tax return he promised to prepare in April.Which of the following statements is true?

A)Ira has earned $500 in February.
B)Ira has a $500 liability in February.
C)Ira does not need to record anything in February.He can wait until April.
D)Ira has to record Cash of $500 in April when the return is prepared.

Question 68

Which financial statement shows Unearned revenue?

A)Income statement
B)Statement of changes in shareholders' equity
C)Statement of cash flows
D)Balance sheet

Question 69

Bankrupt & Baroque,Inc.borrowed $10,000 on January 1 from E-Z Bank for three months at a 6% annual interest rate.The amount of interest due as of January 31 equals $200.

Question 70

Needem,Inc.borrowed $100,000 from Lendem Commercial Bank,on April 1,2009 and agreed to repay the principal plus interest on April 1,2012.The note bears interest at 9% annually (do not compound).Fill in the blanks in the chart below.

Question 71

Why would the Unearned revenue account need to be adjusted at the end of the period?

A)Revenue that had been deferred is now earned.
B)Revenue has been recorded,and cash has not yet been received.
C)Liabilities are unrecorded.
D)Assets would otherwise be understated.

Question 72

Rent-a-Wreck,Inc.paid $36,000 cash for a two-year insurance policy on April 1,2011.What adjustment should the company make before preparing its annual financial statements on December 31,2011?

A)Decrease Cash and increase Prepaid insurance by $36,000.
B)Decrease Prepaid insurance and recognize Insurance expense of $18,000.
C)Decrease Prepaid insurance and recognize Insurance expense of $13,500.
D)Decrease Cash and recognize Insurance expense of $13,500.

Question 73

Record each event in the accounting equation below.Include both amounts and account titles.
3.Which of the four financial statements are affected by the adjusting entry to accrue interest?
4.Would your answer in 2.be different if the note was a $20,000,6-month,9% note instead of a 3-month note?

Question 74

Hen House,Inc.collects all subscription revenue in advance.At December 31,2011,the company owed $50,000 to customers for unearned revenue.During 2012,the company received $150,000 in advance from its customers and delivered $190,000 of magazines to its customers.How much subscription revenue will Hen House,Inc.report on its income statement for the year ended December 31,2012?

A)$200,000
B)$190,000
C)$10,000
D)$210,000

Question 75

Prepaid rent is a(n)________.

A)expense representing rent used up during the period
B)liability representing an obligation to pay for rent
C)part of shareholders' equity
D)asset representing rent that has been paid but not used

Question 76

Rent a Wreck,Inc.began operations on July 1,2012.On July 1,the company paid $9,600 cash in advance for a one-year insurance policy beginning on that day.How much insurance expense will appear on the company's income statement for the month ended July 31,2012?

A)$800
B)$9,600
C)$4,800
D)$8,800

Question 77

Magic,Inc.collected $24,000 in October 2011 from customers in exchange for 12-month subscriptions to its monthly magazine Magic Times.The October issue was the first issue of the subscription.Which statement below is true regarding the effects of collecting the cash from customers in October?

A)Assets and liabilities will increase by $24,000.
B)Assets will increase and shareholders' equity will decrease by $24,000.
C)Liabilities and shareholders' equity will increase by $24,000.
D)Assets and shareholders' equity will increase by $2,000.

Question 78

Clean Sweep,Inc.paid $7,200 on May 1,2011 for 12 months' insurance coverage starting May 1.How much prepaid insurance should appear on the company's balance sheet at December 31,2011?

A)$7,200
B)$2,400
C)$3,000
D)$4,800

Question 79

Prepaid insurance had a balance of $1,000 on the company's December 31,2011 balance sheet.On June 1,2012,the company paid an additional insurance premium of $3,000.Prepaid insurance had a balance of $1,250 on the company's December 31,2012 balance sheet.How much cash paid for insurance will be reported on the company's statement of cash flows for the year ended December 31,2012?

A)$(1,000)
B)$(3,000)
C)$(1,250)
D)$(4,000)

Question 80

Clean Sweep,Inc.started the month of June with $600 worth of cleaning supplies.During the month,Clean Sweep purchased $400 of supplies for cash.At June 30,$300 worth of supplies was unused.How will the company report these events on its statement of cash flows for the month of June?

A)The statement of cash flows will show $(400)cash paid for supplies.
B)The statement of cash flows will show supplies expense of $(1,000).
C)The statement of cash flows will show supplies expense of $(700).
D)This is a trick question.The statement of cash flows will not report anything about any of these events.